The Beast Unleashed : Deflation Is Here To Stay
- This topic has 16 replies, 10 voices, and was last updated 10 years, 10 months ago by
.
-
Posts
-
National Photo Co. Federal Clothing Store, Washington, D.C 1925 The time has come. The Automatic Earth has been talking about the inevitability of def
[See the full post at: The Beast Unleashed : Deflation Is Here To Stay]Don’t forget Martin Armstrong!
Just got into his blog recently. Found this link there for us Canadian TAE’ers:Forget house prices and debt, deflation is Canada’s new bogeyman
This is going to be a very expensive tact if the timing of the cycle is miss read, and we have already passed the Deflation phase and are heading directly into the Crackup Boom.
I mean, the very headline, as cocksure as it sounds, might stampede the more vulnerable into doing some rash things with their scarce resources, maybe?
Folks, I don’t mean to sound in defiance of the meme here, but it is not wise to jump to conclusions based on punditry, mine included.
But, could it be the “D” scare has already been exercised? The Fed is shaking in it’s boots? It has, so far been pouring money into the bucket faster than it is running out? If shocked enough, it will fill the well to the point money is running back up through the holes in the bucket, and it floats away on a green tide?
Lot of questions here? ??
Meanwhile, I’ll wait for that new car to deflate to under $12k and the price of a cart of groceries to fall from $300 to $100. And a movie with popcorn to fall back under a buck, six bits again, before I congratulate such a confident call here.
Y’all do what you will, I’m hedged for several possibilities, and will adjust strategy as the cards fall.
The cream of the crap rises in our parasitic trickle-up economy. Psychopaths that have studied normal interactions all of their lives are now adept at hiding amongst us in plain sight. They can be very charming at first. But wait until they attain the privileges they seek. That’s when the honeymoon is over and unimaginable horrors will probably take its place. After all, war is the greatest wealth transfer system ever invented by mankind. The Psychopaths miss Bush because he was nothing more than an intellectually impaired faulty meat suit with simian wet ware to them. Oil majors have profitability concerns ? NP – just get some regional wars to boil over. Not the first time blood sacrifices have been made to ensure their profitability.
Arguably the real issue facing us today is the increasing equality — albeit an equality of suffering. I see more and more people in the middle class whose lives are collapsing, and that means the American Empire’s collapse is not far behind. And who are they turning to for answers? Most of them turn to Fox, Glenn Beck, talk radio, right-wing religion, etc. They’ve never want to hear what anyone else has to say. Empires have never gone gentle into that good night. The troubling aspect of that fact is that today’s empires have nuclear weapons.
.. could it be the “D” scare has already been exercised?
First of all, it’s not ”the “D” SCARE”, it’s simply called deflation. But pray tell, what signs are there that D has been around yet at all, let alone “already exercised”?
.. If shocked enough, it will fill the well to the point money is running back up through the holes in the bucket
It hasn’t given any indication at all of any intent to do that, while deflation has now settled in and picked her favorite chair, it’s only been busy handing your money to the primary dealers. The Fed has not been”printing” anything whatsoever, it’s only been taking money away from people, who will therefore have less to spend, which will sink the velocity of that money.
What was the question again?
Deflation should be the natural order of things. As people become more productive, prices should fall. But they haven’t, and they haven’t because they’ve been artificially propped up by cheap money, lots of leverage, speculation, accounting changes (mark to fantasy), blah.
As Ilargi says, QE was to bail out the banks, to get their bad assets off their books and onto the public’s books. Look at the crap MBS the Fed has taken from the banks.
These are psychopathic thinkers, used to shifting blame and losses whenever and wherever possible (have had a lot of experience with these types of people).
I pray deflation comes because I think the Earth is about near the end of her rope.
On Velocity. Where does Velocity go from all time record lows? Especially if massive reserves begin pouring into a system suddenly sparked by “Animal Spirits?”
Helped along by pent up demand for dilapidated plant, equipment and rolling stock, a “New Deal” or three, along with bank’s change of heart from hoarding to being afraid of missing the boat?
How fast could the rate of change in Velocity move to the inverse of the rapid fall on the chart above, when the creators of the currency, and most all credit, pull out all the stops?
Reminds of a sign an old friend put on his ranch gate. “My dogs can make it to this gate in 20 seconds. Can you?”
And who knows what will trigger the inevitable perception that the train might soon leave the station?
Feel lucky at timing?
Is “Luck” a sound investment philosophy?
Raleigh,
couldn’t agree more. Deflation is a natural process of Free Markets, much along the lines of Natural Selection. It creates real prosperity, increasing purchasing power and wealth. I have yet to find a nation destroyed by it.
However, the nemesis of Free Association is, of course, Authoritarian Control. Therein, is the problem. Central Planning always ends in this sort of thing because it distorts natural process.
They never learn, those who grant absolute consent to authority.
Ilargi,
Disinflation is enough to drive Central Bankers to panic. We have most definitely experienced that these last few years.
Indications they will do the monetization dirty? From the get go, TARP, Twist, QE 1,2,3,,,that we know about. Unless you have had a peek at the Feds balance sheet, what’s in there we don’t know about? And the big question, “What more are they willing to put onto that secrete ledger.” Junk car loans? Mastercard balances? Municipal debt? The sky is the limit!
It’s not recommended one waits bated breath, for the Central Bankers of the world to step forward and announce capitulation, close up shop and go home. It’s just not what they do. It is my book here that they have gone too far over the falls now to back pedal.
I’ll try and stay with the debate, but hard to do with outdoor temperatures in the 80’s here this week.
The only thing I see at this point that can help avert this disaster from it’s ultimate destructive end game, is a re-backing of the currency with something real, and an admission the debt must be allowed to clear by natural process, default.
Since as many have looked at the inside of the vaults at Ft. Knox as have looked into the Feds inner workings, I’m not banking on that kind of solution.
There is only one other way that will prolong the Status Quo long enough to allow it’s maintainers to stay in charge, and to set up off shore havens. Print, by any name it’s assigned, PRINT!
Hi Professor, I am on your side of the coin my friend; but this was an exceptionally persuasive article.
Going to raise some more cash as soon as the markets open, it’s China that has me worried the most. Getting real bad vibes about the situation there, and I don’t scare easily.
A decline in oil prices is actually inflationary – for oil importing countries. Think of it this way. Money spent on oil consumption leaks out of your country and goes to the exporters. High oil prices act like a tax and a decline in those prices acts like a tax cut. Now, for a country like the USA where domestic production has been soaring, the picture is kind of muddled. An oil price cut will stimulate the consumption centers of metro areas and depress places like North Dakota.
PLNL (Isn’t that the name of Hornady’s reloading machine? I’m a Dillon man myself),
One of the bloggers I follow, Charles Hugh Smith, uses the following tactic when analyzing such things. Cui bono or, who benefits? High inflation helps debtors and hurts debt holders. While the USG is a large debtor, who are the holders of all that debt? Forget foreigners for the moment as they can’t vote. Domestically it’s insurance companies, pension funds, banks, corporations, etc. Those entities own the USG.
Next, high inflation can ONLY be created by Congress. Yellen cannot send $10,000 checks to everyone in the country. All of the money that the Fed has “created” is all debt-backed. Very little of that has found its way into the system. As for lending, it takes two to tango. Banks must be willing to lend and consumers or businesses must be willing to borrow. Low interest rates have spurred many to borrow but even that is running out of gas. Witness the horrible Christmas shopping season. So large amounts of money won’t enter the economy that way.
This brings us back to Congress. Do you really think that today’s Congress would launch a huge stimulus program? They can’t even agree on unemployment insurance. It would also require them to admit we aren’t really in a recovery and politicians will do anything to avoid admitting a mistake.
Here’s how I think this will go down. We will essentially follow the 1930’s playbook (and also the current European periphery). Something will happen to crash the stock market. We’ll have a classic deflationary crash with liquidity drying up. Cash will be king. The President will come out and talk about how the US will never default on their debts that we’re trustworthy and we all have to do our duty and fulfill our obligations and on and on. This will be “resource grab” by the elites that Nicole has talked about. Eventually the populace will become fed up with the depression and elect either a madman or “chicken in every pot” populist. This person will crank up the printing presses and start showering the people with money, jobs, etc. That is when we’ll see high inflation.
Bottom line is that the shift will not happen overnight. Those of us paying attention will see the swing. Keep your wits about you and your powder dry.
One must be careful when reading charts. From what I see, growth RATES in M1, M2 and M3 may be flat or declining, but they are still POSITIVE. This means all three money metrics are expanding, not contracting. Thus, there is no deflation in these three money aggregates.
There is now enough “money” in the system to cause a massive inflationary crack-up if the banks open up the money spigots. We’ve dealt with cost-push inflation in consumer prices for many years. While incomes, on average, stagnated and velocity declined. That’s stagflation.
But North America now has an abundant supply of oil and gas. Energy is THE fundamental input for, well, everything. Including the economy. So, if energy can become “cheap” relative to incomes, this, combined with technological advances that increase productivity (and there are huge advances in tech coming to market) could drive a huge economic boom, as incomes play catchup to prices.
The deflationary pressures would still be there as debts are paid down, but flooding the real economy with money would go a long way to making those debts easier to service. Those with savings could be decimated. Sacrificial lambs, as it were, for the greater good. Which in this case could mean staving off wide-spread revolts.
Not a prediction, but a potential scenario.
Do you think it’s just coincidence that suddenly the US is becoming more energy independent? The oil and gas has always been there in places like North Dakota, the Barnett et al, and I’m guessing the US geological survey knew it all along. It’s just now (barely) economical to extract it. While, the boom could be short lived, it could have a massive impact.
So the energy is there. The “money” is there. The people are getting fed up. Let the money flow, let wages rise, let debts be paid down with devalued money. And in ten years a 2 million dollar bungalow in the burbs will be commonplace, gold will be $20,000 per ounce, and Wal-Mart workers will be earning $80,000 per year.
Possible? I dunno. Look at what happened from the late Sixties through the Seventies. And some used to cal that The Great Inflation. Sounds quaint today. But that’s the game. In fact, that’s the only game they got.
Ilargi,
Like Ing Inv above, I’m having trouble interpreting the ShadowStats US Money Supply Growth plots in the same way that you have. It looks to me that, over the ’03 – ’14 period, the M3 line puts at least as much area above the +5% mark as it does below, and more so in the M1 and M2 cases. Does this not imply something in excess of 70% expansion of the M3 measure during this period?
At the same time, the fall in velocity of M2 looks to be around 18%, so my overall interpretation of these graphs would be that the Inflation x GDP product has increased by roughly 40% during this time. Or have I misunderstood something?
That’s not to say that I don’t support the deflationary argument, and the D word is something I never thought I’d hear being uttered by Christine Lagarde. It’s also interesting that here in the UK we’ve magically achieved our ‘target’ 2% inflation figure after years of overshooting it. I wonder if this is seen as good or bad news by those that matter.
OldE
Ing Inv,
I agree that there is a lot of “money” in the system, but my question to you is HOW will this money enter the economy? You talk about “turning on the spigots” but how would this work in practice? The money that the banks are sitting on are loans from the Fed so the banks will not simply drop $10,000 in everyone’s checking account. They could loan the money but if that was profitable they would have done it already. They cannot find credit-worthy borrowers who are willing to take on debt.
So again, only Congress can gift money to the people. Now I will grant you that the monster deficits they have been running have added money into the economy and had some inflationary effects. I think many of us have been caught off guard by how long they have been able to keep the machine cranking.
Again, all the money the Fed has “printed” has to be paid back. If they can’t loan that money out and get the fractional reserve money multiplier machine going that money will be extinguished when the loan is paid back to the Fed.
But I have to say that I’m not 100% confident in what will happen. That is why I hang out here as well as inflationist sites to try and get a clue. In the end we just need to keep our heads up and stay flexible.
Chris,
First, I’d like to say that, like you, I am by no means certain as to the future. And anyone who claims they can predict what will happen is naive or just full of it.
That said, one mistake people often make is to look at the economy as a homogenous whole. But from what I see, there is something of a bifurcation taking place in the US. Partly, this because the economy is being restructured. There are those who are going along for the ride, and there are those who are being left behind. For example, I predicted years ago that, due to cheap labor, cheap real estate and abundant energy, the US South could very well be the epicenter of a manufacturing renaissance. However, I did not foresee a 1960’s or 1970’s type of manufacturing sector, but rather a tighter, leaner, high-tech approach that relied far less on human labor. This kind of change requires new skills and technologies that are part of the adjustment.
As for money, while so many people talk about deflation, you must be careful about what kind of “deflation” you mean. Debt deflation? Price deflation? Asset deflation? Wage deflation? Now that we are passed the GFC, where is the deflation in any of these? Don’t look at averages, like average income, because these figures can include those who are not working, thereby driving down the average.
The money that the Fed prints to monetize US government debt is not really where the inflation comes from on the government side. It comes from the government in the form of debt issuance. And they have no intention of ever paying that back. All they care about is paying the interest. And they now even do that with borrowed money. If the US did not issue its own currency and service its debt in that currency, then deflation would be an assured outcome. But the US does “print” its own currency, and that currency is still the most widely used reserve currency, backed by the strongest military. They can never repay the debt, but they can try to inflate it away in cooperation with other nations (many of whom by the way are in worse shape than the US).
Inflation is the only major tool they have. It’s a fundamental part of the banking system and the economy. Inflation is the source of bank profits and a huge generator of hidden taxes for the government. As long as they can manage the decline in the value of dollar without upsetting the other stakeholders (e.g. the bond market) they will severely devalue the dollar for many years in order to keep the debt service manageable.
I believe that the main reason we are seeing the recent energy boom in the US is because it’s something of a last-ditch attempt to spur the economy, attract capital to the US, and shore up the dollar (relative to other currencies). It also can relieve pressure on the military to control the flow of foreign oil. Furthermore, it might signal the beginning of the end of the petrodollar regime.
If we look at US assets, stocks, housing, oil, natural gas are all rising. This could result in an economy that grinds higher and perhaps goes through a cyclical boom period. That’s not to say that everything will be fine. The overriding theme here is that we’ve collectively spent too much of our future income. So even with very high inflation in wages, most people will still be falling behind. And the government will be hunting down every dime and imposing higher taxes and more of them. We could see a money paradox. Workers earns a lot more money, but are still poorer than we were before. So any economic boom would be a bit of an illusion, but if they can manage, it, they can achieve a slow burn economy where the reality sets in over a long period of time of financial repression.
Sorry if this seems a bit rambling and disjointed. It’s late and I’m not really editing my thoughts. Just keep in mind that the government and the banks LOATHE monetary deflation. We had a deflationary episode in 2008-09. It looks lik that may have caught them off-guard. But now they are going to fight tooth-and-claw to prevent another such episode. They are printing and printing, adding more and more fuel in the hopes that soon the economy will catch fire
. I think that if your job is pretty secure and you have lots of savings, that is actually the last thing you would want. But barring an all-out collapse, it looks like it’s already baked in the cake. I mean, you gotta think that, even if the end game is total collapse, we could go through several more economic fits and spurts. Given all the oil and gas in North America, I see no reason why that could not happen in the world’s largest and most advance economy.
- You must be logged in to reply to this topic.
Sorry, the comment form is closed at this time.